Record increases in the price of food have kept the rate of inflation above 3pc – despite falls in petrol, clothing and financial services. The average household will be hit hard and, although many branded goods companies have been able to absorb rising input costs, basics have increased dramatically, according to our own measure of inflation, the Real Cost of Living Index.
The latest figures from the official Consumer Price Index show the extent of food inflation over the past year. Fruit prices have risen by 10pc, fish is up 8pc, vegetables 5pc, while bread and cereal prices have risen by 3pc.
Investors interested in balancing their books should look to harvest profit from the price increases (although the usual caveats of getting advice apply). Here are 10 ideas to get you started.
1 AGRICULTURE ETFs
Although an agriculture exchange-traded fund (ETF) can be volatile, increased scarcity of land and a growing global population mean that over the long term experts expect food prices to rise. “This aggressive soft commodity inflation is due to the transient nature of climatic harvests,” said Jeremy Batstone-Carr, from stockbrokers Charles Stanley.
“Fires in Russia and extreme weather conditions in Asia have meant an extremely poor harvest. I believe prices will go down in the short term, but we won’t see previous lows again.”
ETFs are funds that can be traded on the stock market. Their underlying assets mirror a particular index or sector, in this case agriculture stocks, the largest weightings being soy beans, corn and wheat. Since the beginning of June the price has increased from $5.50 to $6.78 now.
As ETFs are listed on the stock exchange, they have a price that changes daily. More information is available at www.londonstockexchange.com.
Britain’s biggest supermarket has long ceased to be solely a greengrocer. The only British supermarket with a global presence, it has operations in the United States, Korea and China, to name a few. Tesco also offers financial services, petrol and its “Direct” website, where you can buy own-brand and big name electricals, furnishings and toys. The sheer size of the Tesco empire means that it is well positioned to absorb any increases in input costs.
Share price: £4.05
3 ECLECTICA AGRICULTURE FUND
Eclectica’s fund was the first of its kind when it launched in 2007 and it still leads the pack despite a volatile year – if you had invested £1,000 in the fund a year ago it would now be worth £1,147. The fund’s three-year performance figure is less impressive, a fall of 5pc, but the FTSE lost 13pc in the same period.
Eclectica’s remit is restrictive – it invests only in the agriculture sector’s “inputs”, such as corn, grain and fertiliser – and this makes for a volatile fund, advisers say.
Meera Patel of Hargreaves Lansdown said: “We do tip this fund but because it only invests in agricultural inputs it can be very changeable. Last year, for example, there was a good corn harvest, with plentiful supply, which pushed the price down.”
The consumer goods giant owns big name brands such as Ben & Jerry’s, Flora, Hellmann’s, PG Tips and Knorr. Mr Batstone-Carr said: “Unilever’s appeal lies in its global diversity. Half of its revenue comes from emerging markets, and these aspirational people are spenders not savers,” he said.
Unilever does not just produce food products either.
“This country is an ageing population, and though we are counting the pennies over food, people continue to spend on anti-ageing and beauty products, which Unilever produce.”
Share price: £17.02
Although considerably smaller than Tesco, valued at £7.6bn against Tesco’s £32.5bn, Wm Morrison can more easily absorb costs than a food manufacturer.
Jonathan Jackson, head of equities for stockbrokers Killik & Co, said that while a bread maker would struggle if wheat went up, supermarkets had pricing power. Keeping prices low will keep customers happy and the supermarkets will be rewarded with consumer loyalty.
Share price: £2.86
6 ABERDEEN EMERGING MARKETS FUND
“This is an emerging markets story,” said Mark Dampier of Hargreaves Lansdown. “The continued urbanisation of the developing world will lead to further pressures on the agricultural sector.”
As standards of living improve in areas such as Asia, so do diet aspirations. The growing middle classes eat more meat, which puts more pressure on crops as the volume of crops required to feed a cow is far greater than the amount needed for crop production for human consumption.
“Eighty-five per cent of the planet’s population is bettering themselves, and with that comes the desire to have the same diet as us. The thought of that is terrifying – there simply isn’t enough food to go around,” Mr Dampier said.
The past couple of months have seen boardroom changes at J Sainsbury. A new development director has helped Sainsbury’s focus on its goals – long-term growth and expansion. Last summer, the supermarket chain announced that it would open 2.5 million sq ft of extra space by March 2011, amounting to 7.5pc growth a year. Sainsbury’s also plans to expand its financial services.
Share price: £3.55
8 ASSOCIATED BRITISH FOODS
People who previously picked up their weekly shop from high-end supermarkets are now frequenting cut-price retailers such as Lidl and Aldi. Demand for own-brand products has also grown, which is where a manufacturer such as ABF could prosper. “Food retailers are approaching supermarkets to offer to manufacture own-brand products that aren’t of substandard quality,” Mr Batstone-Carr said. “If you do not make the number one product in the market, and feel that you have little chance of closing the gap, it’s a more business-savvy option to diversify.”
Share price: £10.23
9 SARASIN AGRISAR FUND
Sarasin invests in the agricultural supply chain: from machinery to supermarkets, including fertiliser producers, irrigation developers and salmon farming. Because of this diversity, the fund is considerably less volatile than Eclectica’s, although you may miss out on large soft-commodity surges. “We would recommend Sarasin’s fund to someone looking to agriculture for the first time,” Ms Patel said. In the past year it has returned 14.5pc.
This Aim-listed company owns land in Ukraine that yields many wheat and some rapeseed crops. Unaffected by the recent fires in Russia and poised to benefit from its neighbour’s export restrictions, this company is high risk but has the potential for high returns. The company’s largest shareholders are Invesco Perpetual and JP Morgan, and the share price has picked up in the last quarter with wheat prices.
Share price: 9.75p